Valuation of a Repriceable Executive Stock Option |
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Authors: | Takahiko Fujita Masahiro Ishii |
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Affiliation: | (1) The McDonough School of Business, Georgetown University, Washington, DC, 20057, U.S.A. |
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Abstract: | We introduce a path-dependent executive stock option. The exercise price might be reduced when both the firm’s stock price and a stock market index fall greatly. The repriceable executive stock option has a simple payoff that may be used for realistic executive rewards. We show the valuation formula, and compute the probability of the repriceable executive stock option expiring in-the-money. Both price and probability are important pieces of quantitative information when choosing an executive compensation package. |
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